By Vera Eckert and Nora Buli
FRANKFURT, Sept 16 (Reuters) - Soaring power and gas prices have rocked energy companies across Europe, forcing utilities and traders to secure extra funds from governments and banks to cover margin call requirements.
Below is an outline of how they got to this point:
EMERGING RISK?
Europe has thousands of energy firms operating in a liberalised power and gas market intended to provide guaranteed competitive prices.
Signs of market strain started appearing quickly in 2022 with an unprecedented jump in European gas and power prices due to a confluence of factors, including high post-pandemic energy demand, cuts to Russian gas supply in the wake of the war in Ukraine and unusually low nuclear and hydropower generation.
To manage risk, several producers sell some of their power up to three years in advance on exchanges, but this also requires making security deposits to guarantee future deliveries in case of default.
These deposits - known as margin calls - have risen sharply in line with prices, leaving several companies badly exposed to bankruptcy as they are unable to find cash fast enough.
To avoid insolvencies, governments and regulators are now stepping in to help provide access to fresh money.
WHY DO VOLATILE PRICES COST MONEY?
Wholesale and exchange-based commodity markets such as gas, power, coal and oil require down-payments from utilities to cover open liabilities, which rise when there are unusually wide price fluctuations.
Selling future output ahead necessitates paying buyers a safety deposit or margin in case the producer cannot deliver. Once the supply is received, the producer gets their money back.
Germany's benchmark power contract for 2023 surged to a record high of 1,050 euros ($1,064.81) a megawatt hour (MWh) in late August, 14 times the level a year ago. Benchmark European gas prices have surged up to 340% in a year.
WHAT IS THE DAMAGE?
Norwegian energy group Equinor estimated that European companies need at least 1.5 trillion euros to cover the cost of their exposure to soaring gas and power prices, and that does not include Britain.
WHO HURTS, WHO DOESN'T?
Europe's energy crisis has taken the biggest toll on companies needing fossil fuel raw materials and has been easier to navigate for those with more renewables in their portfolio.
Generally, those with deeper financial reserves are better protected than medium and smaller power generation operators or companies with large trading activities.
However, big players with large forward sales positions are feeling the strain, among them Finland’s Fortum and Swiss power company Axpo, both of which are now getting financial guarantees from their governments.